Saturday, March 2, 2013

News » Article Insiders benefiting in charter deals

Board members and administrators from more than a dozen state-funded charter schools are profiting from their affiliations by doing business with schools they oversee.

The deals, worth more than $70 million over the last five years, are legal, but critics of the arrangements say they can lead to conflicts of interest. Charter executives, on the other hand, say they are able to help the schools get better deals on services and goods ranging from air-conditioners to textbooks and thus save taxpayers money.

The Arizona Republic reviewed thousands of pages of federal tax returns, audits, corporate filings, and records filed with the Arizona State Board for Charter Schools. The analysis looked at the 50 largest non-profit charter schools in the state as well as schools with assets of more than $10 million. For-profit schools were not analyzed because their tax records are not public.

The Republic’s analysis found at least 17 contracts or arrangements, totaling more than $70 million over five years and involving about 40 school sites, in which money from the non-profit charter school went to for-profit or non-profit companies run by board members, executives or their relatives.

Arizona has 535 charter schools that enrolled about 144,800 students this school year, or about 14 percent of students in public schools.

Arizona’s regulations on charter schools are relatively lax. The state allows charters to seek exemptions from state laws that require schools to obtain competitive bids for goods or services. Nearly 90 percent of the state’s charter holders have gotten permanent exemptions from the state Board for Charter Schools, according to the state’s database.

The schools’ purchases from their own officials range from curriculum and business consulting to land leases and transportation services. A handful of non-profit schools outsource most of their operations to a board member’s for-profit company. The transactions are legal provided schools report the relationships on their federal tax forms and board members abstain from voting on their own contracts.

In one case, school officials in Phoenix thought they were exempt from purchasing laws and failed to put a contract out to bid for non-academic services that were worth hundreds of thousands of dollars. In another case, a Glendale school purchased a van for almost twice its value and had to get the money refunded.

It’s impossible to know whether any money was potentially diverted from classrooms through insider transactions or lack of competitive bidding. Several charters said they saved money but were unable to provide specifics; others did not respond to interview requests. Some said they contracted with a school official’s company because the quality of the product or service was better than what was on the market.

Educators and ethicists say the arrangements raise questions about whether the schools are being used partly for personal gain.

“This is crony capitalism,” said Alex Molnar, an education professor at the University of Colorado-Boulder who has studied charter schools. “This is greasing the palms of special-interest and favored individuals.”

A for-profit company paid by a charter school, even a company that operates most of the school, does not have to disclose spending details or how much profit it makes. Some board members who did business with their schools told The Republic they made a profit on the transactions. Others said they lost money. Some refused to comment.

Charter-school leaders say most executives and board members operate with good intentions when they conduct business transactions with their schools. The schools want to stretch their funding, and school leaders who own businesses can give the schools a good deal on products or services.

Being exempt from purchasing laws gives schools more flexibility, allowing them to focus more on the classroom and less on red tape, charter-school officials say.

“I see a lot of my schools really using thrifty, cost-effective methods,” said Eileen Sigmund, president and CEO of the Arizona Charter Schools Association, a non-profit group that provides support services for charter schools.

For example, she said, one charter-school leader picked through Northern Arizona University’s surplus equipment to get desks for classrooms.

Because Arizona charter schools receive on average $1,700 less in annual state funding per child than district schools, charters “really have to be efficient,” she said.

Charter schools are public schools that are independently run by non-profits, for-profits, school districts or state universities.

Charters get less funding on average largely because, unlike school districts, they can’t ask voters in their surrounding areas to pass bonds and overrides to bring in more money. About 96 percent of charter schools operating now are authorized by the state and the rest by school districts or state universities.

Molnar, the education professor, said because charters are publicly funded, they should be subject to state procurement laws. Board members shouldn’t be allowed to do business with their own schools, either.

“Do you want to be a charter-school board member or do you want to be in the business of selling things to a charter school?” he said.

A book-sales edge

The 15 schools under the non-profit Great Hearts Academies offer a college-preparatory curriculum that stresses classic literature. That means students get an intensive reading regimen.

To supply the books, the schools have been making regular purchases for at least the last three years from a Tempe-based textbook company called Educational Sales Co. Daniel Sauer, the company’s president and CEO and a shareholder, is also an unpaid officer of the Great Hearts Academies non-profit.

Since July 2009, the schools have made $987,995 in purchases from the company.

Great Hearts also gives parents the option of buying books directly from the company. Six of the Great Hearts school websites feature links only to Educational Sales’ website for parents who want to buy a second set of books for use at home.

Great Hearts CEO Dan Scoggin said he doesn’t believe there is a conflict of interest because Great Hearts has no mandates on where its schools buy books. Many Great Hearts schools use several vendors based on pricing, service and availability, he said.

Great Hearts schools are exempt from state purchasing laws. Scoggin said Great Hearts doesn’t have a contract with Educational Sales because schools have choices on where they make textbook purchases.

Scoggin said Sauer has been a generous donor to Great Hearts schools. Sauer has donated $50,400 since December 2007, according to Great Hearts. He also lent the non-profit $300,000 in February 2011 to buy an empty office building in Phoenix that was converted into schools. The loan, with monthly interest-only payments of $1,042 at 6.25 percent, was repaid in January 2012, Scoggin said.

“He’s just a great gentleman,” Scoggin said of Sauer. “All of our board members give to the schools.”

Sauer did not return a call seeking comment.

Exempt from laws

School districts in Arizona must follow state purchasing laws.

That means they must get three oral quotes for purchases between $5,000 and less than $25,000 and three written quotes for purchases between $25,000 and $50,000. Above $50,000, other provisions kick in, including using competitive sealed solicitations. In narrow circumstances, they can bypass the rules, including a health or safety emergency in which the district needs to procure services quickly.

The rules are designed to ensure that schools get the best prices and competition is fair.

Charter schools also have to follow procurement laws with slightly different thresholds, but unlike districts, they can seek exemptions from their authorizing body, most often the Arizona State Board for Charter Schools, whose members are largely appointed by the governor.

The exemption becomes part of the school’s contract with the charter board. If the board wants to cancel an exemption, the charter holder has to agree. The board has never withdrawn an exemption, said DeAnna Rowe, the charter board’s executive director.

Schools seeking exemptions must adopt a policy that purchases must be made in the best interest of the school. The school “shall not” purchase any goods or services from a board member or a member’s immediate family unless the board authorizes the purchase and potential benefits are fully disclosed, the policy says.

Rowe, the board’s executive director, said while the board could change the policy, “at this point in time the policy, if implemented with fidelity, is appropriate.”

The exemptions concern some legislators. Sen. Linda Lopez, D-Tucson, who is on the Senate’s Education Committee, said the charter board is handing out too many and charters shouldn’t be exempt from state purchasing laws.

Charter schools weren’t set up with this in mind, she said, but rather “to provide an educational setting that may meet specific needs or try out non-traditional methods of educating students,” she said.

Schools without exemptions are required to have a systematic review of their purchasing practices in annual audits required by the state. Schools with exemptions don’t get as much scrutiny of purchasing in the audits.

Family ties

The Gaddie family reflects how family ties can run deep at charter schools.

Happy Valley School in Peoria has a three-member non-profit board made up entirely of Gaddie family members, according to the most recent federal tax return. Ernest Gaddie is president. His wife, Delite Gaddie, is secretary, and their son, Glen Gaddie, is a board member. Glen also serves on the school’s governing board along with three other people.

For several years, the school has contracted with Gaddie Curriculum & Education Consulting, a business owned by Ernest and Delite Gaddie. The company provides business consulting, maintenance and operations services and licenses curriculum to the school, according to tax returns and audits. Ernest and Delite created the curriculum while at a private, back-to-basics school they ran in Mesa in the 1970s. They own the copyrights and update the materials from time to time, according to an audit.

From fiscal 2007 through 2011, Gaddie Curriculum was paid $475,433 for various services, tax returns say. In 2011, the non-profit also began contracting with a landscaping service owned by the son and grandson of the board members, paying $21,600 that year.

The school has been exempt from purchasing laws since 2004, according to the state charter board, but the school has its own procurement policy. Three oral bids are required for purchases of more than $5,000 and three written bids for purchases of more than $15,000. Purchases of more than $50,000 require three sealed bids.

In 2010, the school’s auditor in the annual audit began questioning the contracted services with the Gaddies’ company, and said the value of the agreements “were not supported by documentation that provides the method and/or rationale for how such fees for services were determined to be at fair value.” The auditor recommended that the school document that the amounts paid were at fair value. School officials said they would try to find out the current costs of curriculum sold to similar schools.

The 2011 audit expressed the same concerns. Glen Gaddie told auditors he would provide documentation. The school declined to provide documentation about the fair value of the agreements toThe Arizona Republic, and the Gaddies declined comment.

The audit findings in fiscal 2011 did not rise to the level of requiring a corrective-action plan by the state Board for Charter Schools, said Rowe, the board’s executive director. A corrective-action plan would have required the school to make changes to correct the issue by a specified date.

No board restrictions

Nothing prohibits a school’s board from being all family members.

The state doesn’t set limits on the number of family members. The Internal Revenue Service doesn’t restrict board membership, but in recent years it has required non-profits to disclose more information about their boards.

Beginning in 2008, the federal tax return asked for the number of independent board members, those who are unrelated and with no financial transactions with the non-profit, as a way of finding potential conflicts of interest.

Charter officials say it’s common for family to be involved in the same charter school. When a new school opens, the founder is essentially starting a business from scratch, said Frank Riggs, president and CEO of Charter Schools Development Corp., a non-profit that helps charter schools finance buildings.

“The old rule is you rely on family and friends to help you get started. It’s a passion. It’s a cause,” he said.

As a school grows, Riggs said, it’s important for the charter to have a representative board that goes beyond mainly family members. Too much family creates a potential conflict of interest.

“You have family members who could vote as a bloc,” he said. “Or worse yet, there is a disagreement between family members that could paralyze the operations of that school board.”

Typically, a board should have at least five and no more than 10 people, he said, with an odd number of members to prevent a tie when voting.

The schools are the brainchild of Michael and Olga Block, who envisioned a college-prep curriculum that would rival the best countries. The first school opened in 1998 in Tucson. A second followed in 2003 in Scottsdale.

For years, the Blocks worked for and were paid by the non-profit schools. Michael was the chief operating officer and treasurer, Olga the chief executive officer.

The Blocks later formed a separate, for-profit company and in 2009 signed a service agreement with the non-profit that provides Basis’ six schools with most everything they need to operate: school directors, teachers, accounting, technology, human resources, public relations and Michael and Olga Block.

The non-profit signed a 10-year agreement with the Blocks’ company. Michael remained on the non-profit’s board as an unpaid director while Olga resigned from the board.

Michael Block said the company, now employing about 500, was originally formed as a way around the state retirement system so employees would receive 401(k) accounts instead.

In fiscal 2011, the non-profit paid the Blocks’ company $9.8million out of $13.7 million in total spending.

Although playing dual roles, Block said as a board member, he refrains from voting on any matters related to his and his wife’s company. He feels his presence on the board is valuable. As co-founder of Basis schools, he brings a unique perspective to board discussions, he said.

The management company that the Blocks operate is an approach that for-profit schools have used for years. Now, management companies are becoming common among non-profit schools as they seek to open new locations.

Benefits include the ability to centralize services for all the schools, charter leaders say. A curriculum director may serve eight schools, rather than each school having to hire a similar expert. Each school is then charged a fee for services.

While management companies have advantages, some educators are critical of them because as private companies, less information about the use of taxpayer money is publicly available.

The lack of transparency is a real issue, said Gary Miron, an education professor at Western Michigan University who publishes an annual report on education management companies. States need to have better laws that spell out what must be disclosed, he said, including how much the companies are paying administrators and teachers.

Basis Inc. denied a request from The Arizona Republic to review a copy of its agreement with the Blocks’ company.

The state also is limited in what it can find out about management companies. The state charter board can audit only the charter school, not the private company hired to run the school’s operations.

Salary information is more limited. As employees of the non-profit, the Blocks had their salaries disclosed in federal tax returns.

A few of the Blocks’ relatives also received money for work performed for the schools, including a relative who performed accounting services for the schools in the Czech Republic, as recently as fiscal 2009.

The tax returns no longer include these details because the Blocks work for the privately held company, not the non-profit. Michael Block said the company is a private business and declined to discuss salaries or whether family members are performing work for the schools.

“We’re not mediocre, so I don’t feel embarrassed by saying, ‘Judge us by our results,’” he said.

Craig Barrett, former Intel chairman and CEO and president of Basis’ non-profit board, said that Basis produces fantastic academic results at a lower cost than comparable public schools, since charters get less per-pupil funding, on average, than district schools.

As a result, Barrett has no problem if the Blocks can make a profit.

“I don’t think anyone should be bothered by that,” he said. “The results are really the only metric people should look at.”

Barrett said the non-profit board had an independent analysis of the agreement with the Blocks’ company to make sure costs were fair and appropriate.

Public trust at issue

An ethics expert says it’s generally problematic to have board members also doing business with the schools they govern. The transactions — even if well-intentioned, as many are — can erode public trust when people find out, said Judy Nadler, a senior fellow in government ethics at Santa Clara University. The perception may be that the board members received the contract because of insider knowledge or relationships with their colleagues, she said.

“It really is best to err on the side of caution and really try to avoid these types of mixing of your policy and your profession,” she said.

Nadler said board members can often easily justify the transactions because they know the board member and often trust the person. But the board needs to look at the transaction from the public’s perspective, realizing that the purchase can plant seeds of doubt in people’s minds.

In the end, a board member needs to differentiate between being a businessperson from being a policy maker, she said. Boards that oversee non-profit schools are there to serve the public, she said.

“If you’re tempted to get involved in the business end of the deal, you have to really look at which one of these will you give up,” she said.

Arizona charter leaders say charter schools, by their nature, are different from district schools. Charters use public funds to independently run schools to achieve academic results. The key word, they say, is “independent.” Unlike school districts, whose board members are elected by voters within a geographic area, the people involved in starting a non-profit charter school are often the ones who also maintain a presence on the boards. They have sometimes invested their own money into the venture.

Some parents also realize that charter schools are different from district schools when it comes to their operations. Laurel Durham’s daughter, Julie, went to Veritas Preparatory Academy, a Great Hearts school, for three years and graduated in 2008. Durham said she was unaware that many of the schools purchased books from a company owned by an officer of Great Hearts. She said she isn’t bothered by the transactions, but “certainly that would be suspect in any other educational system.”

Some changes could be coming.

Rowe, the charter board’s executive director, said the board is expected to vote soon on new guidelines for schools that may change the criteria schools need to meet if they want to get procurement exemptions. Rowe said it’s possible the board may also look at whether to place a school with repeated procurement violations on a corrective-action plan requiring steps to correct the issue by a specified date. Another place the state board can address procurement violations is as part of a school’s 15-year contract renewal. A report to the board includes any procurement issues.

Ultimately, though, the state is looking broadly at whether a school is accomplishing what it was founded to do.